US Stocks Rally as Cooling Inflation Tempers Fed Rate-Hike Fears

US stocks advanced on Tuesday, with the S&P 500 rising 0.5% and the Nasdaq 100 climbing 1.4%, as a decline in consumer prices in June reduced the likelihood of an imminent interest rate hike. The moves reversed Monday's slump, according to Bloomberg data.

The Labor Department reported that the consumer price index fell 0.4% from May to June, the first monthly decline in six years. Year-over-year, CPI rose 3.5%, down from 4.2% in May. Core inflation, which excludes volatile food and energy categories, was unchanged month-over-month and rose 2.6% from a year earlier, down from 2.9% in May — a broader slowdown than economists had expected.

The data provided immediate relief to financial markets, which had been bracing for the possibility of a rate hike. After the CPI release, traders slashed rate-hike bets, pricing in only about a 15% chance of a rise in borrowing costs at the Fed's July 28-29 meeting and about a 65% chance by September.

**Fed Officials Urge Caution**

The reaction from the Fed's top officials was measured. Chairman Kevin Warsh, in his first congressional testimony since taking office in May, told the House Financial Services Committee that while the CPI data was "positive relative to expectations," he was not declaring victory.

"There's plenty of work to do, and I would feel more confident if we had better data to inform our decision-making," Warsh said. He declined to say whether the "work to do" included a rate hike or merely a prolonged hold in the current 3.50%-3.75% range.

"Over the coming period I'm going to ask our colleagues and have a good family fight about the extent and timing in which we would need to deploy" the Fed's monetary policy tools, Warsh said, according to Reuters.

Chicago Fed President Austan Goolsbee echoed that caution. He called the CPI report "surprisingly benign" and "encouraging," but said he would need "several months more" of such readings to feel confident inflation was heading toward the Fed's 2% target.

"I'm heartened by this CPI data today, but we need a lot more than one month to think that it is going well," Goolsbee told the Kenosha Area Business Alliance in Wisconsin.

**Waller's Explicit Warning**

Fed Governor Christopher Waller, speaking on Monday before the CPI release, had already signaled he would take little signal from a single cooler reading. He said he would need to see several months of easing inflation to feel comfortable, and that another hot reading would require a "near-term" response from the Fed.

"Surprising people is not a good idea," Waller said, according to Reuters.

Waller's explicit language contrasted with the more guarded approach of Warsh and Goolsbee, highlighting the divisions within the rate-setting committee. According to Fortune, about half of the Fed's 19 policymakers penciled in higher interest rates by year-end in forecasts released last month, while the other half supported keeping rates unchanged or cutting them.

**Warsh Defends Fed Independence**

During his three-hour testimony, Warsh also faced questions about political pressure from the White House. President Donald Trump, who nominated Warsh, has long demanded lower borrowing costs. When asked directly by Rep. Gregory Meeks (D-NY) whether he would follow the president's wishes or the data, Warsh replied: "My commitment to you is to follow the law and follow the data, follow our very best judgment."

Earlier, when Rep. Nydia Velázquez (D-NY) asked whether he worked for President Trump, Warsh answered: "We're an independent central bank."

Warsh also noted that the Supreme Court's recent decision to allow Fed Governor Lisa Cook to remain on the board, thwarting Trump's attempt to fire her, affirmed the Fed's independence, according to Fortune.

**Markets Eye Producer Prices, Geopolitical Risks**

Investors are now awaiting Wednesday's Producer Price Index, a gauge of wholesale inflation. That data will help analysts estimate the June reading for the Personal Consumption Expenditures Price Index, the Fed's preferred inflation measure, which will not be officially released until after the July policy meeting.

The cooler inflation figures reduce pressure on the Fed to hike rates, but risks remain. The renewed conflict in the Middle East has driven oil prices higher, with Brent crude surging to $84.51 a barrel on Tuesday, according to Bloomberg. The escalation could reverse some of the recent progress on inflation in coming months, as noted by Fifth Third Commercial Bank Chief US Economist Bill Adams, who said the outlook for July is less promising due to higher gas prices.

Warsh, in his testimony, identified AI investment as "the most striking feature of the economy right now" and said the Fed is "monitoring the implications" for inflation and jobs, Fortune reported.

The Nasdaq 100's gains were fueled by a recovery in South Korea's memory giants, lifting US semiconductor peers. Bank stocks were mixed: JPMorgan Chase rose 1.5% after reporting its highest quarterly profit ever, while Wells Fargo fell 2.9% after results, according to Bloomberg data.

The combination of softer inflation data and cautious Fed commentary provided a floor for equities, but officials made clear they are not yet ready to declare the inflation battle won, leaving the monetary policy path highly uncertain.